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Stocks trading for less than they’re intrinsically worth, otherwise known as value stocks, are not always easy to identify. In fact, finding them can be downright painful. There are millions upon millions of competing investors looking to do the same thing, and beating them requires a sharp eye for winning value stocks.
In the spirit of Foolish collaboration, we asked some of The Motley Fool’s best and sharpest for a few value picks to get astute investors started. In response, they offered up Ubiquiti Networks Inc. (NASDAQ:UBNT), First Solar (NASDAQ:FSLR), and Amazon.com (NASDAQ:AMZN).
Read on for all the details.
Value in the technology sector
Sean O’Reilly (Ubiquiti Networks Inc.): Ubiquiti serves those who need the best, highest-performance wireless technology out there. Its products include the new UniFI AC In-Wall access point, which converts an Ethernet wall connection into a Wi-Fi access point, an increasingly popular choice these days.
Ubiquiti’s financial performance has been spectacular. For the first three months of the year, it reported revenue of $218.4 million, up 30% year over year. Gross profit came in at $99.1 million. Given the urgent demand for its products, Ubiquiti says it expects net revenue of between $215 million and $225 million for the quarter ending June 30.
You’d think a strong product portfolio and excellent financial results would make for an expensive stock — but that’s not the case with Ubiquiti. The stock trades at just 15.9 times forward earnings estimates, according to S&P Global Market Intelligence. Not bad for a company that sported a return on shareholders’ equity over the past 12 months of 52.2%.
Sharp investors should see there’s still big value here
Jason Hall (First Solar): On the surface, it may be hard to see how a stock that’s risen almost 50% in the past six weeks is still a good value — especially if the company reported a huge loss over the previous year. But that looks to be the case with First Solar.
It should be noted that the solar industry is in a cyclical downturn, and First Solar took a significant non-recurring charge a few quarters back with an eye toward repositioning the business for the next year or so. From a cash-flow perspective, First Solar is in solid shape, having generated more than $615 million in operating cash flow over the past 12 months.
Furthermore, First Solar has one of the industry’s strongest balance sheets, with almost $1.7 billion in cash — more than 40% of the company’s value. This war chest puts the company in a strong position to invest in its capabilities and improving its already-leading thin-film panel technology while the market takes a breather.
And the company’s doing just that. First Solar is planning to skip an entire generation in its panel updates, with plans to launch an even more advanced panel just in time for the next big buying cycle to kick in.
Investors looking to own a best-in-class company with huge financial and technological advantages should give First Solar a close look right now. Even after recent gains, it’s fairly valued, with fantastic long-term prospects.
An “expensive” value stock
Steve Symington (Amazon.com): Amazon doesn’t look cheap, trading at nearly 190 times trailing-12-month earnings and 88 times this year’s estimates. But it never really appears attractive based on traditional valuation metrics, especially given its habit of forsaking bottom-line profits in favor of reinvesting in its business and growing market share. Thankfully for shareholders — and even as it builds now on its huge base — Amazon is an overwhelming success to that end. Revenue last quarter climbed 23% year over year to $35.7 billion. And with the help of its high-margin Amazon Web Services (AWS) segment — where revenue rose nearly 43% to just under $3.7 billion last quarter, and operating income jumped 47.3% to $890 million — profitability is gaining ground. Total net income per diluted share increased 38.3% last quarter, to $1.48 — a respectable jump for a company of Amazon’s size.
Perhaps best of all, as fellow Fool Andrew Tonner pointed out recently, e-commerce still represented less than 9% of worldwide retail sales last year, leaving a massive runway for growth at Amazon’s core retail business. And recent research from Gartner predicts that the market for global public cloud services will increase 18% this year, to roughly $247 billion, which means AWS has plenty of room to continue taking share and delivering outsize growth.
I think you need to be a sharp investor to look past the surface here and recognize the value that Amazon’s stock represents.
Jason Hall owns shares of Amazon and First Solar. Jason Hall has the following options: long January 2018 $45 calls on First Solar. Sean O’Reilly has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Ubiquiti Networks. The Motley Fool has a disclosure policy.